The “war economy“, marked by sharp defence expenditures, a focus on strategic production, and shifting fiscal priorities, produces winners and losers, influenced by geography, economic structure, and political choices.
The global rearmament underway in the 2020s, sparked by renewed great power rivalry, is thus a double-edged sword. States that can harness innovation, diversify defence production, and shield civilian sectors from distortion will thrive. Those forced to choose between guns and butter, as in the Middle East, face stagnation or worse.
On the other spectrum, core manufacturing hubs, innovation clusters, and logistics centres thrive. In the US, Texas’s dominance in defence spending represents localised economic booms, driven by existing or newly acquired infrastructure, skilled labour, and targeted government contracting, bringing jobs, wage growth, and incentives for private sector involvement.
Prosperity is heavily contingent on existing industrial bases, robust fiscal frameworks, and the ability to channel defence innovation into civilian sectors. Where states are forced to import arms or react defensively without strong internal capacity (many Middle Eastern and smaller Asian nations), rearmament is a fiscal and societal stressor. The Stockholm International Peace Research Institute (SIPRI), in its annual report on world military expenditure, stated that the total global military spending reached $2.72 trillion in 2024, marking a 9.4% increase from 2023 and the 10th consecutive year of rising expenditure. As with every trade relationship, there are producers and those who buy from them. In times when wartime appears more probable than any other outcome, states such as the US, Israel, China, and Russia can profit from increased demand for defence and war systems.
In the MENA region, security dynamics are complex and rapidly shifting. For instance, Algeria and Morocco exemplify the classic arms race. Algeria’s 21% allocation of the state budget to defence strains its ability to protect education and healthcare, even as youth joblessness and social unrest grow. While Morocco’s renewed arms imports similarly divert funds from much-needed school and hospital investments, decisions shaped by rivalry, external threats, and global pressure are made at the cost of its most vulnerable citizens. Both countries allocate a disproportionate share of public resources to defence, despite high youth unemployment and education system shortages. Major arms imports included advanced Russian combat aircraft and Chinese drones for Algeria, as well as US/French missiles for Morocco.
Israel’s persistent investment in advanced defence, especially missile and drone countermeasures, delivers short-term security and technological dividends but intensifies regional arms dynamics and diverts resources from civilian priorities. In order to finance the various wars it is conducting, the Israeli government announced in mid-2025 a significant increase in its defence budget to fund prolonged operations and a permanent military buildup. While this strategy strengthens its famed ‘tech-dome,’ creating a lucrative export market for its battle-tested systems, it also places immense pressure on public finances, straining the economy at a time of uncertainty.
Neighbouring states like Saudi Arabia find themselves in a more precarious position. Historically a major importer of Western arms, Riyadh is now attempting to balance its immediate security needs against the long-term goal of developing a domestic defence industry under its Vision 2030 plan. This dual pressure, funding massive arms imports while simultaneously trying to build a new industrial base, stretches national resources thin, creating a direct trade-off with economic diversification goals.
Also in North America, specifically in the US, the budget bill from the Trump administration signals a clear turn towards prioritising defence, suggesting that significant cuts to social spending could counterbalance funding for a larger military footprint.. Indeed, the proposed FY2026 budget outlines substantial reductions of over 22%, or a $163 billion reduction, in non-defence discretionary spending, aiming to reallocate billions from areas like health, housing, education, and climate initiatives towards increasing national and border security.
This pattern is not confined to the Middle East and North America. In East Asia, rising tensions and China’s military modernisation have triggered a regional spending spree. China’s defence budget for 2025 has again seen a significant increase, up by 7.2%, reflecting its sustained focus on modernising the People’s Liberation Army, particularly its air force, navy, and strategic missile forces. Also other nations like Japan are reacting to this evolving landscape, driven by concerns over China’s growing military and North Korea’s missile programs, with a focus on acquiring counterstrike capabilities and bolstering its air and maritime defences.
This global rearmament creates a self-reinforcing cycle of demand, demonstrably benefiting established arms exporters while placing immense fiscal strain on nations forced to play catch-up. This trend not only diverts crucial resources from social development, education, and healthcare but also risks perpetuating a cycle of insecurity, making the prospect of sustainable peace more elusive.
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